Nikkei Asian Review | Chinese Companies Lead the Way in Fintech Innovation

September 8, 2016 12:30 pm JST
By Dr. Edward Tse and Ian Meller

With the Chinese government keen to encourage innovation in the financial industry, the fintech revolution is quickly gaining pace.

Financial technologies companies backed by Chinese venture capital raised $2.4 billion in the first quarter of 2016, according to accounting firm KPMG. This represented a 49% share of global fintech investment in the period, bigger than that of North America and Europe combined.

Ant Financial Services Group, Alibaba Group Holding’s fintech affiliate, itself raised $4.5 billion in April, making it the largest round of funding for a fintech company in the world. Four out of the five largest fintech companies in the world by valuation are now in China, according to Jason Jones, chief executive of lending industry events group LendIt: Ant Financial; Shanghai Lujiazui International Financial Asset Exchange, or Lufax, which operates as; Zhong An Online Property and Casualty Insurance and’s JD Finance. And this market is only set to grow.

The majority of China’s leading fintech players are also its internet giants. Their digital platforms have amassed user bases that have then gone on to serve as the launch point for fintech endeavors. Alibaba and Tencent Holdings dominate the online payment market in China, scaling up faster with convenient financial services that traditional lenders can’t match.

Compared with fintech, China’s financial system is relatively immature. According to the Mintai Institute of Finance, nearly 80% of small- and medium-sized enterprises in China are not adequately served by banks. The People’s Bank of China has found that about three-quarters of the general population is “underbanked” and lack access to financial services.

It is these gaps that allow innovative outsiders to enter the market. This is apparent in the area of credit scoring where the lack of an established model has created the opportunity for internet players to step in.

Ant Financial developed Sesame Rating, China’s first credit scoring system. It uses big data to analyze the purchasing behavior of users on Alibaba’s e-commerce platforms to judge their creditworthiness based on a number of factors.

Chinese entrepreneurs’ willingness to experiment means products and services hit the market quickly and evolve quickly. Initially, AliPay, Ant Financial’s payment service, was used only as a payment method for Alibaba’s e-commerce platform. Now, AliPay can be used at brick-and-mortar stores, for utility bills and even for overseas shopping.

China has become fertile ground for fintech solutions. Online wealth management has gained traction among young middle-class consumers. As more risk-tolerant investors, they tend to favor equities and mutual funds over traditional savings accounts. At $66.9 billion in 2015, China’s peer-to-peer lending market is now the world’s largest and more than four times the size of its U.S. counterpart.

However, the P2P market has been plagued by inadequate regulation and hence, a high frequency of frauds and scams such as the $7.6 billion Ezubao Ponzi scheme uncovered last year. Regulators have since started to get a grip on the sector. After an initial series of regulations were issued at year-end, some 1,600 P2P companies shut down during the first half of 2016. Another series of rules issued in August further restricted the scope of activities permissible to P2P companies, barring them from creating asset pools or providing loan guarantees.

Chinese fintech players are also moving into the nascent blockchain industry. Ping An Insurance Group, one of China’s largest insurers and the owner of Lufax, in May became the first Chinese entity in a global blockchain consortium with Goldman Sachs and Barclays.

Some Chinese companies are leading the pack. Wanxiang Blockchain Labs, a think-tank that is to host the Global Blockchain Summit in Shanghai in late September, is behind ChinaLedger, an alliance of 11 regional commodity, equity and financial asset exchanges that plan to establish an open-source blockchain protocol.

Existing networks help

China’s internet giants have some of the most sophisticated fintech ecosystems. Apart from Alipay and Sesame Credit, Ant Financial also owns Yu’E Bao, China’s largest money market fund. Yu’E Bao raised $90 billion in its first 10 months and accounts for approximately one-fifth of China’s 4.2 trillion yuan ($630 billion) money market fund sector. Ant Financial’s portfolio also includes digital banking, microloans, securities, crowdfunding and other wealth management products.

Tencent founded WeBank, China’s first online only bank, in 2014. WeBank offers consumer, corporate and international banking services. By May 2015, it had launched a personal credit line service to select users without guarantee or collateral through Tencent’s QQ and WeChat messaging platforms. Unlike Ant Financial, WeBank acts as a platform connecting borrowers and lenders directly rather than from its own balance sheet, allowing it to avoid credit risk.

Lufax, launched in September 2011, is China’s first online investment and financing platform. It became the world’s most valuable fintech startup in January after raising $1.2 billion on a valuation of $18.5 billion before getting eclipsed by Ant Financial. Mostly known for its P2P lending service, Lufax’s larger ambitions are embodied in its “9158 strategy” to offer products across various sectors of the finance industry via its platform. By the end of 2015, it had signed up 500 institutions across more than 300 cities.

Zhong An, China’s first digital insurance platform, was jointly launched in November 2013 by Alibaba, Tencent and Ping An. The idea behind Zhong An was to digitize the user experience and insurance value chain. By using the unique capabilities and user bases of its stakeholders, Zhong An was able to launch innovative insurance products that targeted China’s digital economy as well as more traditional liability and property insurance products. In its first year, Zhong An underwrote 630 million insurance policies for 150 million clients.

Chinese fintech companies are now starting to expand overseas. In September 2015, Ant Financial acquired a majority stake in Paytm, India’s biggest online payment company, to gain access to a massive population just beginning to embrace mobile payments. Tencent’s Wechat Pay has now turned into a global wallet for Chinese consumers after it launched clearance services for nine different foreign currencies and built partnerships in 20 countries. Tencent itself has entered the South African market through an alliance with Standard Bank to launch a mobile payment system targeting the emerging middle class.

While the Chinese government is encouraging innovation and technology investment to modernize the financial industry, it is still trying to draw up an appropriate legal framework that wouldn’t stifle growth. The regulation of financial services in China is overseen by multiple bodies with overlapping policies and sometimes unclear guidelines. But there have been concrete developments over the last year. In July 2015, central government ministries jointly issued guidelines that clarify responsible regulatory bodies and roles, as well as legal parameters for specific sectors of fintech.

China’s fintech revolution is already making huge waves. Opportunities are abundant for those able to provide innovative solutions to address critical consumer needs. The impact of China’s fintech innovation, whether in the realm of online payment, wealth management, crowdfunding or elsewhere will be seen and felt worldwide. The foundation established by this pioneering class of Chinese fintech companies will set the stage for even more exciting players to emerge.

Dr. Edward Tse is founder and CEO of Gao Feng Advisory Co., a global strategy and management consulting company, and the author of “China’s Disruptors” (Portfolio, 2015).
Ian Meller is a consultant at Gao Feng.


Tech Crunch | Can Foreign Tech Companies Win in China?

Posted Aug 28, 2016
By Dr. Edward Tse

People have often referred to Google, Facebook and Twitter as cases where foreign tech companies are blocked in China. In reality, while Facebook and Twitter were indeed blocked, Google chose to withdraw because they didn’t want to comply with Chinese censorship regulations.

It’s important to note that most foreign tech companies were not blocked, and companies like eBay, Amazon, Viadeo and, of course, Apple and Samsung all entered and competed in China.

EBay was beaten by Alibaba more than a decade ago. Amazon entered China throughthe acquisition of a local company, Joyo, in 2004, but was never able to build a commanding position in China the way they did in the U.S. Viadeo withdrew in 2015 due to a lack of market traction mostly because of the entry of LinkedIn.

On the other hand, Apple and Samsung have done well in China, despite increasing competition from the Chinese who are chipping off pieces of their pies. More recently, UberChina and Didi Chuxing reached a mutually beneficial deal, though some see it as Uber essentially surrendering the China market to Didi Chuxing.

This all seems to beg the question: Can foreign tech companies win in China?

Clearly, China’s regulatory regime regarding the internet, in particular social media, isfar more restrictive than that of the U.S. and many other western countries in general. The “Great Firewall” has proven itself repeatedly to be a thorn in the side of foreign companies, and not all have been able to overcome this hurdle. Most have tried, but with varying degrees of success.

It all comes down to the company’s mindset and willingness to adapt. Some firms decidedthey didn’t want to play in such a context, like Google, and withdrew their operations. Some want to play but got blocked, like Facebook, yet continue to lobby the government for access. Some were allowed to play but couldn’t quite get their act together (for whatever reason), like Amazon, Viadeo and perhaps even Airbnb. There was also Yihaodian, which was Walmart’s online business, but eventually Walmart sold it to in exchange for some of JD’s shares.

China is not easy. It’s tough for everyone, no matter if one is foreign or not.

But there are some who seem to “get it,” like LinkedIn (at least for now). They entered the China market in 2014 with a dedicated Chinese site, Lingying, andwithin two years grew their user base to 20 million subscribers and counting. How did they manage such a feat where several others failed? They adapted to the Chinacontext. Not only did they localize by conforming to restrictions on content, they partnered with local firms Sequoia China and China Broadband Capital to further understand the China market.

LinkedIn also created local leadership by hiring a president for LinkedIn China, giving the team more autonomy to integrate and cater to local needs. Examples include collaborating with Tencent’s WeChat so users could link profiles, launching a Chinese business social networking app “Chitu” and planning to release a Chinese version of its Pulse news reader app.

Another such example is Evernote. They, too, found success through a focus on meaningful localization. Not only did they hire locally, they employed localized marketing strategies by leveraging local social media like Weibo and WeChat, and had localized customer service, which supports real-time customer support on the mentioned platforms. They did thorough market research before entering in 2012, and looked to solve the “pain points” of the Chinese consumer, mainly security and privacy. Lastly, they had an easy-to-recall Chinese name (Yinxiang Biji) with a memorable pun. This strategy paid off; within the first year after launch they had 4 million users in China, and by 2015 their user base reached 17 million.

The notion that lower-quality clones sprung up because of foreign tech companies being blocked is only partially right. One could argue that the major Chinese social websites of Baidu, Ren Ren, Sina Weibo and Youku Toudu are clones of Google, Facebook, Twitter and YouTube, respectively. While the likes of Ren Ren weren’t able to replicate Facebook-like success in China, others have evolved beyond being clones to having their own unique, innovative ecosystems.

One such example is WeChat. Though it was originally inspired by Kik, and had similar features to WhatsApp, it evolved from mere messaging to becoming an integral part of the Chinese connected lifestyle. WeChat users can now link their bank cards to WeChat Pay, make in-store payments, transfer money to peers, buy movie tickets, hail taxis, pay for utility bills and so on. In fact, the list is practically endless, and shows how WeChat’s business model has become so powerful, and has grown from being a simple messaging app like WhatsApp (which, incidentally is also not blocked in China, but cannot hope to compete on WeChat’s scale).

Foreign tech players tend not to be as extensive in ecosystem building.

Importantly, Chinese innovators are developing new intellectual capital. They are crafting innovative business models and reaching new frontiers of business strategy and organization. Prime examples include Alibaba and LeEco. Jack Ma has built Alibaba into a sprawling internet business through “multiple jumping” from one business area to another, while building its capabilities along the way through a combination of self-built and collaborative partnerships. This disrupted the conventional “core competence” approach that has ruled modern business for the past 30-odd years.

LeEco is, broadly speaking, a “lifestyle” company, with a diverse ecosystem of infotainment content, smart devices and internet-connected mobility. Many commentators by now have pointed out that Chinese innovators are fast, agile and adaptive. However, these are merely phenomenological observations. At heart, the best and brightest of these innovators are deeply reflective on what the new frontiers of business are, focusing on “how can we get it right and do it well?”

Of course, China’s market for tech companies has evolved significantly for over a decade and a half. When Alibaba was competing with eBay more than a decade ago, China’stech market was pretty primitive. Alibaba merely used guerrilla warfare tactics based on its grit to defeat a major foreign player. Today, both the market and the players are much more sophisticated and their business approaches are much more refined. The leading Chinese innovators are digital ecosystem players building scale and creating customer stickiness through their entire ecosystem. Foreign tech players tend not to be as extensive in ecosystem building.

To “win,” foreign tech companies need to adapt to the China context and deeply understand the key factors of success. Local leadership is critical and appropriate empowerment by the global headquarters to the local leadership to do the right things is essential. While for some, the market is not open or they are not welcome, for many, the opportunities are right there. China is not easy, but why should it be? It’s tough for everyone, no matter if one isforeign or not. And no one can be sustainably successful if they don’t observe, learn and adapt.

LinkedIn China’s Chitu, for instance, is struggling to get market traction. Evernote, while achieving early success in China, seems to be facing some challenges forsustainable growth, mainly due to lack of premium paid users and growing competition from Chinese startups. In fact, drawing a line on “who’s Chinese and who’s not” is also somewhat artificial, given that Alibaba’s and Tencent’s largest respective shareholdersare not Chinese, and some of LinkedIn China’s and Uber China’s key shareholders are Chinese.(Sequoia China, whose parent is a Silicon Valley-headquartered VC fund, has its operations led by Chinese venture capitalist Neil Shen, who has a deep understanding of the China context.)

As China’s digital business grows, it’s going to provide more opportunities for many players. Who “gets it” and who doesn’t will certainly not only be a function of “being blocked or not,” but equally (or even more importantly) those who have the right mindset and approach to the China context (and for that matter, China for the world). To this end, it’s a real test of the leadership and capabilities of the companies, as well as the capital behind them.

Dr. Edward Tse is the founder and CEO of Gao Feng Advisory Company, a consulting firm that advises corporations, startups and VC funds on business strategies in China.


SCMP | Midea’s Move for German Robot Maker Kuka May be a Turning Point

PUBLISHED : Sunday, 21 August, 2016, 10:00am

Midea’s Move for German Robot Maker Kuka May be a Turning Point for Chinese Manufacturing

Edward Tse says the takeover bid is emblematic of how Chinese companies are shaking off the copycat label in the march towards ‘Industry 4.0’ and ‘Made in China 2025’

Chinese electrical appliance manufacturer Midea’s move to acquire Kuka, the German robot maker, could be a defining moment in the evolution of China’s manufacturing sector. China’s reliance on low-cost, labour-intensive manufacturing to power its immense economy is no longer attractive, mainly due to the rise in labour and other costs. The world’s second-largest economy needs to seek alternative ways to grow and companies like Midea are showing the way.

Midea was founded in 1968 by He Xiangjian as a small township enterprise. Leading a group of residents in Beijiao, Guangdong province, He raised 5,000 yuan (HK$5,834) to establish a bottle lid production workshop. Midea has since transformed into a global player pushing the technology and innovation frontier.

It currently owns some of China’s top home appliance brands and its total group revenue globally in 2015 was over US$21 billion. Its rise epitomises the thriving Chinese innovational and entrepreneurial spirit that emerged after the economic reforms spearheaded by late paramount leader Deng Xiaoping (邓小平).

For a long time, China’s manufacturers were branded copycats (shanzhai). Even though there are still plenty of shanzhai companies around, many more established companies like Midea are transforming themselves into market leaders and disruptors through innovation, evolution, experimentation and a closer connection with consumers. Midea’s latest acquisition target marks its foray into Industry 4.0.

So why is a maker of fridges and air conditioners interested in state-of-the-art industrial robotics? The heart of the matter can be found in two key phrases, “Industry 4.0” and “Made in China 2025”.

“Industry 4.0” refers to the concept of fully automated production facilities that require minimal human involvement. This fourth stage of the industrial revolution represents the convergence of the internet of things and the control of cyber-physical systems.

‘Made in China’: the smart revolution blueprint set to bring Beijing into the digital age

“Made in China 2025” is an initiative by the Chinese government to drive manufacturing innovation, strengthen the industrial base and promote breakthroughs in key industrial sectors, with the ultimate goal of enhancing international competitiveness and improving the image of Chinese brands. It is one of the most prominent concepts in China’s 13th five-year plan.

China’s latest strategic plan not only involves acquiring foreign companies, but also embracing the principles of Industry 4.0. This was seen in the 2014 Sino-German Cooperation Action Plan under the theme “Design Innovation Together”. This plan facilitates bilateral cooperation where both countries commit to improving collaboration in areas such as mobile internet, the internet of things, cloud computing and big data, along with policy and regulatory support.

Industry 4.0 envisions a future with shortened model and upgrade cycles, and a higher degree of personalisation. For a white goods maker, it means being able to adapt quickly to changing consumer needs while reducing production overheads, costs and the capability to offer solutions based on consumers’ exact needs.

Haier is a good example of a company that has already begun its foray into Industry 4.0 territory. Its latest “Connected Factory Programme” allows it to mass produce personalised products instead of the traditional large-scale factory that only produces one type of product per cycle. Thanks to this new factory model, Haier’s customers will be able to order tailor-made products such as air conditioners that filter out methanol.

While China has traditionally enjoyed low labour costs with a comparatively higher labour-to-production ratio, its workforce of young, cheap labour has become scarce. Facing these new demographic changes, Industry 4.0 stands to shift China’s industry to more automated and labour-light practices. Fang Hongbo, Midea’s chairman, said this was a major motivating factor for their offer for Kuka.

Many regard most industries in China as still operating in the “Industry 2.0” era – a more traditional mass production assembly line system. For these manufacturers, directly diving into Industry 4.0 would be an incredibly difficult leap due to the cost of replacing and upgrading their plants and infrastructure.

This is where Kuka comes into play for Midea. By investing in Kuka, which is heavily focused on digitising its industrial manufacturing solutions, Midea stands to directly benefit from Kuka’s Industry 4.0 expertise and its vast foreign network. Kuka can provide vital technologies to help Midea build up its Industry 4.0 strategy and production lines, while Midea will assist Kuka with its expansion plan and growth strategy in China.

Stuck in the past: how China’s manufacturing powerhouse of Dongguan got left behind

The acquisition would be a turning point that might very well help Midea become part of China’s very own Industry 4.0 vanguard. Other Chinese firms that have recently acquired German companies with Industry 4.0 capabilities include ChemChina (machinery maker KraussMaffei ), Shanghai Electric Group (hi-tech equipment manufacturer Manz) and Shang Gong Group (knitting machine maker H. Stoll).

This trend in acquiring robotics and automation technologies should bring increased efficiency and production to China’s manufacturing. It will also help drive down costs for Chinese companies and assist in reaching their goals of transforming into Industry 4.0 enterprises.

Chinese manufacturers have come a long way from being shanzhai companies, and are now increasingly technology-driven and innovative. Judging from recent developments, it looks like their time has come.

Not many Chinese manufacturers may get there, but some will, and as I’ve always said: “A small percentage of a large number can still be significant.” And, those who do “make it” will serve as role models for many more to come.

Edward Tse is founder and CEO of Gao Feng Advisory Company, a global strategy and management consulting firm with roots in Greater China. He is the author of China’s Disruptors